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Extreme service charges

View profile for Paul McAndrews
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In a recent decision of the Supreme Court, Arnold v Britton[2015] UKSC36, the occupiers of some of the holiday chalets at the Oxwich Leisure Park, on the Gower peninsula, lost their appeal to have their leases read in such a way so as to avoid payment of exorbitant service charge. Some of the leases, which were granted in the early 1970’s, when inflation was running at higher than 10%, much higher than now, obliged them to pay an initial service charge of £90 increasing year by year by 10%. That may not sound too bad, but the leases were for 99 years, and the annual increase of 10% was on a compound basis. As a result, the service charge payable in 2012 was £3,366 and in the final year (2072) will be £1,025,004. A lot of money to pay for having the grass cut and the paths kept tidy.

The result came about because the parties to these leases took a bet that inflation would continue to run at a relatively high rate and the pound would depreciate annually as a result. If it ran higher than 10%, the owner of the land would lose out; if lower, the leaseholder of the chalet would lose out. But the wording of the lease was unequivocal, it plainly stated the service charge was fixed at £90 for the first year and would escalate at an annual rate of 10% of the amount paid in the previous year throughout the remainder of the lease- a fixed amount increasing annually at the compound rate stipulated therein.

In their appeal, the leaseholders argued that the leases should be read in such a way that the service charge clause imposed a cap on the annual amount payable, so that the annual charge did not exceed the limit but would come in lower, to be fixed at an amount which reflected the cost of the actual services provided. Usually this is the case. Most leases, whether residential or commercial, are drafted to provide for service charge to be paid according to what the landlord actually expends and the cost to be shared equally, or in fair proportions, among the leaseholders, whether in a block of flats or a shopping centre. Indeed, for commercial leases, the RICS has drawn up a code of good practice to promote transparency of accounting, advance estimates, impartial dispute resolution, regular consultation and fairness of allocation where, for example, offices or retail units are of different sizes.

In the residential sector, which includes the leisure park at Oxwich, far–reaching rules and regulations have been introduced by Parliament to ensure that service charges, and the services provided in return, are reasonable and that leaseholders are given advance warning and full consultation where major works are contemplated. Even then, they can challenge service charge costs if they consider them to be unreasonable or if they consider that the works go beyond the scope of what the landlord can charge for. The courts and tribunals who deal with these challenges are working flat out to keep up with cases brought by aggrieved tenants for reduction of the service charge claimed by their landlords.

Why then were the unfortunate chalet owners at Oxwich not able to challenge the service charge in this way?  The answer lies in the legislation which has been introduced to protect residential tenants from unreasonable demands; it only applies where the service charge is a fluctuating, variable, amount, payable according to the relevant costs incurred by the landlord in any given year. In the Oxwich leases the annual amount was fixed; it escalated each year according to a formula agreed at the start of the leases which did not allow for variation to reflect the actual amount spent each year by the landowner. The legislation designed to protect tenants from exploitation could not help and the court could not re-write the bargain which had been made.

Where a lease is ambiguously worded, where the service charge clause is capable of more than one interpretation, the courts will give effect to the clause in a way which achieves the fairest outcome, a positive correlation between what the tenant pays and what (s)he gets in return. Indeed, this process can include implying terms, (inserting words which the court considers have been left out unintentionally), into the clause to ensure a fair result. One of the Justices of the Supreme Court in the Oxwich case, Lord Carnwath, ruled that there was ambiguity and that missing words should be imported into the clause to allow for a variable charge. But the majority disagreed and ruled that the clause did not admit of any other interpretation than the one which resulted in the million pound payment in the last year of the lease.

The bet is still on.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.